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The New Corporate Outsourcing

IN the 1930's, the titans of industry tried to smother Social Security, maintaining that it would, as a gentleman from the Ohio Chamber of Commerce harrumphed to a Congressional committee, "permanently weaken the fiber of the American people." Three decades later, when Medicare and Medicaid were being considered, business again took up arms, warning of the doomsday of socialized medicine.

These days, don't expect to hear such talk in many corporate boardrooms.

Under pressure from foreign competitors with lower labor costs, big companies have become more willing to pare away workers' health care and pensions, abandoning an informal social contract that existed for much of the 20th century. To do so without stirring the ire of the rank and file, companies have essentially tried to turn the responsibility for some of these benefits over to the government. Whether by default or design, government is stepping into the breach.

Medicare's new prescription drug benefit, one of the most significant expansions in the program since its creation, has been a boon to companies eager to trim soaring drug costs for retirees. Airlines, auto-parts manufacturers and other besieged industries are jettisoning pension plans, forcing a federal agency to finance them, a bailout that carries echoes of the savings-and-loan debacle of the 1980's.

In low-wage industries like retailing and fast food, companies have increasingly been able to sidestep demands for health coverage in part because some workers qualify for Medicaid, an antipoverty program once only for the poorest but now easier to obtain in many states.

Over time, Big Business has learned how to love Big Government. Or at least some of it.

"This is certainly a huge shift from the days when corporations lined up in an unbroken column to decry these programs as a threat to the American way," said Jacob Hacker, a political science professor at Yale and author of "The Divided Welfare State."

Of course, corporate America is not exactly throwing in its lot with those who champion generous spending on housing, schools or other causes dear to liberals. Business typically distrusts expansive government and fears that more social programs spell more taxes. But it is also willing to accept help in easing labor costs, aid that, depending on your point of view, is either prudent government assistance or brazen corporate welfare.

After Social Security was created, many companies not only learned to live with it, but realized that these benefits could help offset the cost of private pension plans, which businesses had begun to create to encourage a stable work force after World War II.

The combination of private pensions and Social Security, and later health insurance, was the basis for a social compact among industry, labor and government: companies lured and kept skilled workers by offering long-term benefits. Employees in turn pledged their loyalty. But in reaching these agreements with unions, companies also set a trap for themselves by pushing many of their costs into the future.

Today, it should not be surprising that a major supporter of the Medicare drug benefit is the Employers' Coalition on Medicare, made up of companies like Caterpillar and Goodyear and trade groups like the National Association of Manufacturers, which was once antagonistic to such benefits. When the drug plan was approved in 2003, the companies were promised billions of dollars in subsidies.

Some want government to go further.

The chief executive of General Motors, Rick Wagoner, has urged Washington to be "more proactive on health care." The automotive company, which posted a huge loss last week and is trying to avoid bankruptcy, pays $1,500 in health care costs for each car it makes, while some competitors pay as little as $200.

"The big irony in the health care area is that actually American business would be better off if there were a national health insurance system like Canada's," said Theda Skocpol, a Harvard dean who was an informal adviser on social policy to the Clinton administration. "Costs would be easier to keep down and there would be more flexibility. Workers wouldn't be keeping their jobs to keep their health benefits."

That is not necessarily a common belief in the corporate world. Small- and medium-size businesses tend to be hostile to entitlements because they usually do not have union workers with costly benefits. Some large companies, like those in technology, are in the same boat. (Whether the American people would want Canada's health care system is a question for another day.)

This schism is also reflected in Congress. Big Business was once a staunch partner of Republicans who favored less spending, taxation and regulation, but its evolving stance toward supporting entitlements has roiled its relations with the party.

Some of these strains are playing out in the contest for majority leader among House Republicans. The front-runner, Roy Blunt of Missouri, who helped spearhead the fight for the new Medicare prescription drug benefit, supports a more free-spending party in line with the demands of business.

An insurgent, John Shadegg of Arizona, was one of the few Republicans to vote against the benefit, and supports old-school austerity.

"You used to have a balance, where you had labor on one side and business on the other," said Michael D. Tanner, director of health and welfare studies at the Cato Institute, a libertarian research group in Washington that favors reducing entitlements. "You are not seeing that anymore. The people who are legitimately for smaller government have lost one of their natural allies."

The Shadegg faction typifies a kind of simmering reaction to the skyrocketing cost of entitlements. These Republicans are certainly not antibusiness, but they are also not eager to use federal money to rescue companies struggling with labor costs.

At the same time, the Bush administration, while voicing no regrets about the prescription drug benefit, is cracking down on distressed companies that default on their pension plans and make the government take on the burden.

In state capitals, however, there has been a different kind of counterattack, represented by a measure approved in Maryland this month requiring Wal-Mart to spend more on health care. Some state officials across the nation, warily eyeing enormous Medicaid costs, are accusing companies like Wal-Mart of using the program as a crutch to keep their costs low.

AT this point, federal and state governments may have no choice but to fend off demands for more assistance. Without major tax increases or borrowing, it is going to be difficult to sustain current obligations for entitlements, let alone take on new ones, beyond the Medicare drug benefit.

"My view is that that was the last hurrah, and that from here on in, we are going to try to hold on to what we have got," said Donald W. Moran, a health care consultant and former senior budget official in the Reagan administration. "In part, that is because the fiscal dynamics of this really stink. Thirty years out, absent some major change, this thing is going to be a bomb."

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A version of this article appears in print on January 29, 2006, on Page 4004001 of the National edition with the headline: THE NATION; The New Corporate Outsourcing. Order Reprints|Today's Paper|Subscribe